Yielding new benefits from public—private partnerships (page 1 of 3)

Many government organizations are tapping the private sector for capital, technology, and expertise to finance, develop, and manage public-sector infrastructure projects for water, transportation, energy, and telecom, which can become catalysts for economic growth, found a new study by Booz & Company.

PPPs - mutually beneficial relationships between the public and private sectors - are an effective way to bridge gaps between demand and resources, quality and accessibility, and risk and benefit. The ability to share risk, tap external financial resources, and profit from private-sector invest­ments and intellectual capital, gives public-sector policymakers greater flexibility in allocating both human and financial resources.

The number of PPP projects under way, the types of PPP contracts in use and the country's political and economic policies and institutions enable PPPs to stimulate a country's economic growth, with success dependent on the right framework and knowledge­able and trusted advisors - public and private - to assist with structuring, screening, and procur­ing high-value PPP projects.

"With the right circumstances, PPPs can be winning partnerships; governments meet obligations without debt, the public receives better or more services, and the private sector is presented with a wider market," explained Richard Shediac, partner at Booz & Company.

PPPs as a remedy for budgetary constraints

Many governments in the MENA region are under pressure to develop necessary infrastructure with limited resources, investing annually an estimated 5 to 7% of gross domestic product (GDP) in new infrastructure projects. Non oil producing economies are particularly pressed to fund growing infrastructure - creating numerous opportunities for private-sector investment.

Governments face a number of challenges in delivering services in the water, transportation, energy and telecom sectors: public pressure results in lower prices and loss-making services; overstaffing, mismanagement, and corruption means inefficient spending and budget shortfalls; available funds, technology, and human resources don't keep pace with demographic change and limited ability to invest restricts the public's access to diversified products and services.

Relationships with private-sector partners are therefore a natural remedy:
•Private-sector governing principles minimize mispricing, cost overruns, and lack of transparency.
•Sustainable financial expertise provides a larger pool of investment funds, eliminating financial constraints on government entities.
•More robust investment sources enable partners to meet increased demand and channel resources to previously underserved consumers.
•Private-sector organizations can attract and offer new services.

The 11 types of PPPs, classified into four categories, provide several options and opportunities for structuring agreements that best fit the project. Greenfield agreements are the most utilized PPPs - especially for build, own, and operate (BOO) and build, own, and transfer (BOT) agreements.

PPP participation varies across sectors

"A necessary service to which the public has an inherent right is considered a "public good," but projects with a greater degree of public good tend to have lower returns, and inspire less interest from the private sector," explained Rabih Abouchakra, partner at Booz & Company.

"Water, a pure public good, must be affordable, but its low ROI makes it unattractive to the private sector.